Finding the next Tesla: How to spot momentum stocks early in the game

After a year of triple-digit gains for the likes of Netflix (NFLX), Tesla (TSLA), Best Buy (BBY), and Facebook (FB), investors are busy trying to find the next big winner. According to Joe Fahmy, managing director at Zor Capital, these so-called “momentum plays” typically have two common traits.

“On the fundamental side, their earnings and sales are accelerating,” Fahmy says in the attached video. “And on the technical side, they’re usually breaking out of some sort of technical pattern and moving to the upside.”

With that in mind, Fahmy brought a list of ideas to Breakout that he thinks could fit the bill and deliver the kind of upside investor dream of.

Fahmy’s first pick is hardly a new theme but it is clearly showing renewed signs of momentum. While the Biotech sector (IBB) has been rising and setting record highs for six years, its recent surge looks to be accelerating. Specifically, the sector gained 65% last year and 32% the year before, but a two-month sprint of close to 20%, (representing 4x outperformance versus the S&P 500) is a sign that better days are ahead.

“I still think it’s in a great uptrend,” says Fahmy in the attached video. “A lot of the companies (in it) still have powerful earnings growth, huge pipelines of (new) drugs and will continue to grow through acquisition. I think some of the bigger names (CELG, GILD, AMGN, BIIB) will be bigger than Merck or Pfizer 3 to 5 years from now.”

Fahmy also see lots of blossoming growth within tech right now, particularly amongst companies that manage and manipulate so called “big data.” One such momentum play that he likes is a company called Splunk (SPLK). Since its debut in April 2012, this San Francisco based provider of operational intelligence has risen more than 140%

“Every deal that’s going on in big data, meaning the indexing of all this data, Splunk is involved,” Fahmy says. “They’re the leader and the main company in this space.” For the record, Splunk is forecast to deliver 66% EPS growth this quarter and 40% sales growth.

The final so-called ‘mo-mo’ pick from Fahmy is a play on the boom in data and internet security. Again, he has chosen to play it via a new but rapidly growing company called FireEye (FEYE). “It’s made a big run recently,“ he says of the stock which came public at $20 four months ago and closed yesterday at $70. “Longer term I think this is one of the biggest players, and you’re (still) getting this early.”

He’s the first to admit that these types of stocks often ‘’get ahead of themselves” and that would-be buyers need to be on the look out for dips and consolidations. In fact, just this week, JPMorgan downgraded FireEye to neutral from overweight in the wake of its huge short-term move.

“Fundamentally, these companies are the new growth names,” he says, noting that most investors still aren’t familiar with them. “As you research them and get to know their stories, you’ll find that these are big winners potentially in the long term.”